As many investors will know, stock trading is a serious vehicle for increasing your wealth and achieving better returns on your investments. However, one aspect of trading in shares that is even more volatile, but even more rewarding is buying and selling penny stocks. Penny stocks are shares that trade at lower prices than most well-known or established stocks and as a result usually trade for as little as $1 a share. This makes for an albeit more volatile and risky investment option although the lower prices also allow for better returns should you invest well.

Why Invest in Penny Stocks and what are the best Trading Tips?

Because penny stock companies are usually newer and less established businesses their low-cost shares are usually traded on minor stock exchanges rather than the London or New York stock exchanges. However, their low price allows for bigger returns as well as minimising risk as you do not have to invest a substantial amount even for a large number of shares.

1. Practise Penny Stock Trading with Minimum Investment

A good way to get started trading in penny stocks is by practising your share trading with little or no investment of your hard-earned cash. This could be creating a simple spreadsheet to track your selected stocks for a number of weeks without actually buying any shares and seeing how well they do. In addition, you can begin with small amounts and seeing if you turn a profit before moving on to bigger investments once you gain more experience and confidence.

2. Research your Investment Opportunities

The world of share trading is littered with many failed investors and people who have lost their money because of a lack of knowledge and understanding of what they are buying into. As such, if you’re ready to start investing real money in penny stocks then it pays to carry out research into companies you’re interested in. There is no room for sentiment in penny stock trading, instead be sure to understand the business, its cash flow, risk and potential news flow before hitting ‘Buy’.

3. Have Realistic Profit Expectations

Many people come to stock trading hoping to get rich quick. The reality is that the majority of share trading is more of a long-term strategy although penny stocks are seen as more short term due to their inherent risk and volatility. As such it’s also worth adjusting your profit expectations, - an approach that can actually help you earn more as you’re then likely to make less risky decisions.

4. Always Respect Risk

One way to minimise your losses is to always have a healthy respect for risk. Penny stocks can be hugely volatile and yet can often be hawked as the next best thing by those promoting them. In this case it’s always worth keeping an eye on the stock’s liquidity as well as only ever investing an amount you’re comfortable with.

5. Spread your Investment Portfolio

Following on from the point above, any good investor will know that it makes sense to diversify your portfolio of investments. Do not put all your eggs in one basket, as the saying goes, but aim to invest in a manageable number of stocks and shares to protect yourself from losing all your capital in one go.

The tips above are not a comprehensive guide to investing in penny stocks but are a good starting point nonetheless such that following them will help you be on your way to more successful trading.